Not surprisingly, the Estate vs Trust debate has often seen the two terms used interchangeably. After all, both Estates and Trusts are primary components referenced in the estate planning process. Nonetheless, their inclusion in the probate process is the only similarity they share; these terms are two unique legal concepts.
If you intend to plan the future of your Estate, it’s a good idea to learn the difference between Estate and Trust. This guide was designed to teach you everything you need to know about the Estate vs Trust discussion, including:
What is a Trust?
A Trust is a fiduciary arrangement made between a trustee (usually a person or organization) and a grantor (someone looking to transfer their ownership of assets) on behalf of beneficiaries (a neutral person set to receive the grantor’s assets). Simply put, a Trust is a legal agreement between the grantor and trustee. The trustee will promise to hold and manage assets given to them by the grantor until the criteria of the trust agreement are met, not all that different from an escrow account. Once the terms of the trust agreement are met, the trustee will then be responsible for distributing the assets to the beneficiaries.
What is the purpose of a Trust?
In its purest form, a Trust is designed to help grantors transfer their assets to beneficiaries. However, the purpose of a Trust goes beyond simply transferring assets; it also helps ensure the beneficiaries are ready to claim the assets for themselves. If for nothing else, some beneficiaries may lack the knowledge, skills, or experience to manage the assets in question. As a result, the Trust will hold the assets until the beneficiaries named in the agreement are ready and the terms are met.
The nature of a Trust agreement ensures the transfer of assets from one entity to another, as long as the terms of the agreement are met. Consequently, the relative security associated with Trusts has increased their optionality. Trusts may be used for a variety of reasons, not the least of which include estate planning, charitable donations, and managing funds for minors until they reach a certain age.
What is an Estate?
When used in the legal sense, an Estate typically refers to the cumulative net worth of an individual’s assets at the time of their passing. More specifically, however, an Estate accounts for everything, including debts and liabilities. Therefore, an Estate is the total value of a person’s assets at the time of their death, less any debts and liabilities they may have. When all is said and done, an Estate is a short-hand description of what someone is worth. Instead of listing everything out, however, the inclusion of the word “Estate” during the probate process assumes the total value of one’s assets.
What can be included in an Estate?
Estates include all of the assets and entitlements someone owns or has a controlling interest in at the time of their death. Conversely, an Estate may not include any assets that are jointly held with another person or entity, nor does it account for anything that was transferred or assigned by the time of passing. With those clear distinctions out of the way, an Estate can include, but isn’t limited to:
What are the limitations of an Estate?
The limitations of an Estate are typically set by the local municipality and its corresponding rules and regulations. That said, some broader limitations may be applied to Estates all over the country:
Liabilities: One of the biggest limiting factors of an Estate, or at least its worth, is existing financial obligations. More commonly referred to as debts or liabilities, existing financial obligations are legally required to be paid by the Estate. Any outstanding debts must be paid by the Estate before any assets can be distributed. In doing so, the net worth of the Estate is diminished, relative to the size of the debts.
Costs: In addition to liabilities, the state may incur additional costs from the probate process. legal fees, court costs, and other expenses are the responsibility of the Estate itself. As a result, the additional costs will limit the Estate’s value.
Taxes: The size and location of the Estate may subject it to additional taxes, once again reducing the value of the cumulative assets.
Duration: The length of time it takes for an Estate to go through the probate process can take anywhere from a few months to a few years. As the probate process is unfolding, beneficiaries may not have access to the assets held by the Estate, limiting interaction and distribution.
Legal hurdles: In the event a beneficiary or other party challenges the validity of the Will or anything associated with the probate process, litigation may increase the duration and legal fees.
Several things can limit an Estate, but some of them are completely avoidable. Take the legal hurdles, for example; they can be completely avoided with an articulate estate plan. If the Will and letter of instruction that accompanies an estate plan are clear and leave no room for ambiguity, the risk of legal obstacles is drastically reduced.
There’s no doubt about it; proactive steps can reduce limitations set on an estate plan. As a result, it’s in everyone’s best interest to make sure their estate plan is up-to-date and ready for the challenges ahead.
Estate vs Trust: What’s the Difference?
For one reason or another, Estates and Trusts are often confused with each other. On the surface it makes sense; both are legal entities that may be used in the estate planning process. However, upon closer inspection, it becomes very apparent that the two are drastically different. Let’s take a look at the biggest differences between Estates and Trusts:
Definition: To be clear, Estates and Trusts share very few similarities. While an Estate is merely the total value of a person’s assets after they pass away, a Trust is a legal entity designed to hold, manage and distribute assets on behalf of beneficiaries. One is the assets themselves and the other is a legal entity designed to hold and distribute them.
Creation: There is no need to create an Estate; it is automatically created when someone passes away. A Trust, on the other hand, is created and established by the grantor while they are alive.
Management: While an Estate is not created, an executor or administrator will be called upon to manage the Estate during the probate process. The executor is usually named in the Will of the person who passed away and is responsible for taking care of the Estate’s final affairs. When a Trust is created by a grantor, they will appoint a trustee. The trustee will be responsible for managing and distributing the assets in accordance with the grantor’s wishes and Trust agreement.
Probate: As the cumulative total of a person’s assets after they pass away, an Estate generally goes through the probate process. The probate process usually facilitates the management and distribution of the Estate. While Trusts can go through probate, they generally avoid the process altogether. Instead, a Trust can mature and distribute its assets before the grantor even passes away.
Privacy: A Trust is a private agreement made by a grantor on behalf of beneficiaries. Nobody else but the trustee, the appropriate authorities, and the financial institution holding the assets even know of its existence. Estates, however, are public knowledge made available to anyone who looks for it.
Rules and regulations: Both Estates and Trusts are subject to their own rules and regulations. The laws that govern each set strict limitations and must be followed by everyone involved.
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The Estate vs Trust debate doesn’t hold a lot of water. While both are technically legal entities that can be used throughout an estate plan, they are drastically different. An Estate represents the total asset value of an individual after they pass away. A Trust, on the other hand, is a financial vehicle used to hold, manage, and distribute assets on behalf of beneficiaries. That said, it can’t hurt to educate yourself on the process. Doing so will come in handy when you decide to set up your estate plan or Trust.
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